Paula Roth is a PhD student at the Department of Economics. Her main interests are micro and macro-economic theory and consumer finance. Her most recent project concerns the effects of income inequality on the behavior of low and middle-income households.

Abstract: Financial distress has become an increasing problem in many countries in the Western world. Previous cross-sectional studies have related the high rates of insolvency to increased inequality on the aggregate level. Many scholars argue that this trend might be explained by individuals' desire to Keep up with the Joneses. In other words, that they consume more than they can afford to be able to keep up with increasing consumption levels in their reference group. Using unique panel data on individual insolvencies I evaluate whether there is a relationship between inequality in one's reference group and the probability to become insolvent. I evaluate several measures of inequality, as well as different assumptions about the relevant reference group. The results suggest that there is a positive relationship between inequality, measured both at the aggregate and individual level, and insolvency.

Abstract: In this paper, we study the role of risk-sharing in facilitating innovation. Studying entrepreneurship and innovation entails modelling an occupational choice and an effort choice. Risk-sharing may increase the number of individuals who become entrepreneurs by limiting the downside risk. The effort of entrepreneurs may, however, be hampered by high risk-sharing if this limits the returns faced by successful entrepreneurs relative to unsuccessful entrepreneurs. We construct a theoretical model where risk-sharing may be private or public, i.e., provided through the welfare state by means of taxation. We show that the level of risk-sharing matters for the characteristics of entrepreneurs. Moreover, high taxes, which imply high equilibrium benefits paid out to unsuccessful entrepreneurs, encourage entrepreneurship but discourage effort.

First Impressions Last - Does Inequality Increase Status Consumption and Household Debt? Joint with Elin Molin.

Abstract: In the last decades, most of the western world has experienced a simultaneous increase in income inequality and household debt-to-GDP. In the United States, it is the low and middle-income households that drives the rise in debt-to-income. This has induced researchers to empirically investigate whether there is a causal relationship between the two trends. Some empirical papers have suggested that income inequality gives rise to higher debt for low and middle-income households through their preference to "Keep up with the Joneses". We make several contributions. First, we show that standard Keeping up with the Joneses utility functions cannot generate this relationship unless one imposes the assumption that the rich are more impatient than the nonrich. Second, we present an extended version of the keeping up with the Joneses utility function that generate outcomes that are consistent with data, with the main assumption is that status is built up over the life-cycle. In addition, we use Swedish micro data to show that consumption among nonrich households is positively affected by increasing incomes among the rich.

Publications

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